In a ruling highlighting the limits of ubiquitous pollution exclusion clauses in property insurance policies, the Washington Supreme Court held that an insurer had a duty to defend a claim where the insured’s prior negligence led to pollution, notwithstanding a pollution exclusion clause. See Xia v. ProBuilders Specialty Ins. Co., 393 P.3d 748 (Wash. 2017).

Zhaoyun Xia (“Xia”) purchased a new home from homebuilder Issaquah Highlands 48 LLC (“Issaquah”). Issaquah was insured under a general liability insurance policy through ProBuilders Specialty Insurance Company (“ProBuilders”). The insurance policy included a pollution exclusion clause that covered “gaseous” and other pollutants including “vapor” and “fumes.” Xia became ill soon after her move-in. Investigation revealed that Issaquah had improperly installed the water heater, which led to carbon monoxide releases. Xia sued Issaquah and notified the insurer, which declined to defend and indemnify Issaquah based on the pollution exclusion clause. Xia settled with Issaquah, was assigned first-party causes of action, and sued the insurer, in the shoes of the insured, for coverage.

The insurer prevailed at the trial and intermediate appellate level. The appellate court held that the pollution exclusion clause applied, and that ProBuilders did not breach its duty to defend. On appeal to the Washington Supreme Court, the justices agreed that the carbon monoxide in Xia’s home was within the scope of the pollution exclusion clause under the policy. A majority of the court also held, however, that the insurer had a duty to defend, because its insured’s negligence – the failure to install the heater properly and, later, to discover and correct the defect – was a “separate step” “in the same causal chain” as the subsequent carbon monoxide releases. Accordingly, although the releases were an “excluded peril” under the pollution exclusion clause, the alleged acts of negligence were “covered occurrences,” because a water heater usually “does not pollute when used as intended,” and improper installation and later acts were not otherwise specifically excluded under the policy. Xia had explicitly raised the negligence question in her original complaint.